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BoE Economist Spurs Sterling Reversal

Daily Analysis - 22/06/2017

Pound Remains Volatile Amid Conflicting Viewpoints

A speech by Bank of England Chief Economist Andrew Haldane on Wednesday reversed the Pounds recent downturn following remarks delivered by Bank of England Governor Mark Carney at the Mansion House speech earlier this week. The economist’s more hawkish viewpoint stoked expectations that the Central Bank may yet have the scope to raise rates and tighten policy before the end of 2017.

Haldane Comments Send Pound Surging

Contrasting sharply with the more dovish remarks issued a day earlier by Bank of England Governor Mark Carney, the Central Bank’s Chief Economist Andrew Haldane took to the stage with a more hawkish outlook for monetary policy. During his remarks, Haldane highlighted the possibility of raising rates and tightening policy before the end of the year.

Even though risks from Brexit may unfold throughout the second half of the year, inflation outpacing wage gains could come back to hurt the economy if left unchecked according to the policymaker. His comments were enough to spur a spike in the Pound, sending the currency higher against most peers before pulling back from earlier strength. After the steep rally on the back of more hawkish sentiment, Sterling has given back all earlier gains against the Euro, with the EURGBP pair mostly flat on the session, trending just above 0.8800.

Crude Carnage Continues

After three straight losing sessions, oil has found some support during the Asian overnight session, managing to rebound modestly following a tumultuous downturn on Wednesday that sent futures to 10-month lows. Despite the weekly Department of Energy report on crude oil stockpiles which recorded a 2.541 million barrel drawdown in crude inventories, US output climbed to a new cycle high of approximately 9.35 million barrels per day. Besides marking the fastest pace of production in two years, IEA forecasts indicate that output is set to continue rising during the coming months.

Even though Iranian Oil Minister Bijan Namdar Zanganeh underscored the possibility of cutting aggregate OPEC output even further to offset the resurgence of US shale, the market reaction to this jawboning was relatively insignificant, sending WTI to just above $42.00 per barrel before reversing higher to just over $42.50.

US Existing Home Sales Rebound Despite Tightening Inventory

Following the disappointing building permits and housing starts data, existing home sales figures compiled monthly by the National Association of Realtor’s managed to surprise to the upside. Expectations of a -0.50% contraction in sales for the month of May were handedly overcome, with the figure rising 1.10% month over month to a seasonally adjusted annualized pace of 5.62 million sales.

In addition to the optimism, the prior month’s data was also revised modestly higher, spurring confidence in the outlook. However, the NAR warned that housing price gains might not be sustainable, proving instead to be the function of falling supply of available homes. Although the data propelled the dollar higher in the aftermath, the US dollar has since fallen against peers as market participants question the Federal Reserve’s ability to raise rates a third time this year. The result has been increased haven demand, pushing precious metals higher.

Bank of Japan Deputy Highlights Need for Low Rates

Despite the US Federal Reserve’s tightening efforts, policymakers at other major global central banks appear see no major need to adjust policy at this time as evidenced by recent decisions and commentary. The Japanese economy in particular has been reaping the benefits of a more accommodative policy vis-à-vis a competitive Yen which has helped spur gains in trade, inflation, and overall growth.

As a result, Bank of Japan Deputy Governor Kikuo Iwata cited economic momentum as the strongest reason not to raise rates, especially with inflation still well short of the 2.00% targeted by officials. However, pressure is growing on the Central Bank to unveil its plan for reducing accommodation, especially as growth accelerates on the back of strong corporate earnings, climbing exports, and better consumption. After weakening moderately on Wednesday, the Yen has strengthened overnight, erasing all losses against the Euro from a day earlier.

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